Falling oil prices and our Dr. Pangloss

Okonjo-Iweala_Ngozi (1)Tuesday Column by Ifeanyi Uddin

As with governments the world over, the Goodluck Jonathan administration is wont to stretch its luck. What to make of the claim, for instance, that the “new, and bigger” Nigerian economic output base is the result of the administration’s effort over the last four (five?) years? How do we rank, in this Panglossian narrative, the administrative and legislative reforms enacted by the Obasanjo administration (since 2003, at least); and the effect of these on boosting the economy’s growth potential?

If the incumbent federal government often overdoes its chest-thumping, the opposition (or what masquerades under this rubric in Nigeria) is as parsimonious in its appraisal of the federal government’s activities, as it lacks detail in the options it advances for dealing with its perception of the challenges faced by the economy. Would that these antipodean perspectives countered themselves to the benefit of the people!

Still, all of this is to nitpick, if recent developments in the global economy mean as much as initial comments suggest. Between June, this year, and last week, the price of the nation’s showpiece export, Bonny Light, is estimated to have dropped by a little over 20%. Need I re-state that despite the incumbent government’s much-vaunted “transformation agenda”, hydrocarbon exports still make up close to 90% of the country’s foreign exchange earnings, and about 80% of official receipts?

On the assumption that the transformation agenda has been as successful as the federal government claims, then are we to suppose that the “diversification of the economy’s base” (a much-abused phrase in our context), without which this over-dependence on oil proceeds would always remain a major vulnerability, was never one of the goals of the administration’s reform effort? Without this assumption, then the “transformation agenda, as a highly successful undertaking” narrative comes up hard against its first main caveat. Does it matter, anyway, at this point, that we do not have much insight into the “opposition’s” thinking on this?

The new oil numbers do not look good. Estimates provided by Financial Derivatives Company Limited (in its latest monthly report), put government receipt from oil at US$7.03bn this month, if oil prices remain at US$90 per barrel. Equivalent to a 7% drop on September’s numbers, this lower earning will push the fiscal deficit above 3% of GDP (remember that the denominator in this ratio is the much higher, new number), put added pressure on an already tenuous external reserve balance, and literally help kick-off a war by speculators on the naira. Poor currency! This new headwinds will be coming at a time when we appeared poorly prepared for the effect on the naira’s exchange rate of increased capital outflows, as portfolio managers the world over re-balance their businesses to reflect the strengthening dollar.

Below US$80pb, the fiscal picture worsens terribly. At that point, we would be sitting precariously on the oil price benchmark (US$77.5pb) on which the 2014 Appropriations Act was worked out. Monthly government revenue would plunge by US$6.25bn. The fiscal deficit would near 4% of GDP. This I guess is the point where push then comes to shove. The point at which we measure, outside of official government rhetoric, how resilient the economy has become as a result of government’s complete overhaul of it.

This is the point at which we all begin to sound like the effete opposition when we point to the fact that by exaggerating its limited successes government has poorly prepared the people for the coming shock. We got by the last crisis because there were fiscal buffers with which the central bank (largely) attacked the problem. These buffers (basically, a large external reserve base), it helps to recall, were built up by a previous government.

We do not have buffers of any description this time around. Moreover, the effect of the cognitive dissonance that would arise amongst the populace, as they begin to feel the headwinds bite more than government had prepared them for it would be an even worse predicament. Over the coming months, if the downward sloping oil price continues, expect the people to panic. It would help if both the government and the opposition can keep their heads above the resulting choppy waters. For this to happen with any chance of success, it would matter that both never believed the rhetoric with which they regularly attacked themselves. On past form, however, I would not be counting on any of these.

Ifeanyi Uddin, an economic historian and finance expert, is on Premium Times’ editorial board.

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